24 November 2006

Milton Friedman and the public sector

Since 1989, the year Ronald Reagan, the American president most in tune with Mr Friedman's ideas, left office, and the Berlin Wall came down, America's government has grown just as fast as its economy—an economy which has barrelled along for much of that time. The state's slice of GDP is forecast to be 36.6% in 2006, up from 36.1% 17 years ago. The public sector has also swollen in Europe's three biggest economies—Britain, France and Germany—and in OECD economies as a whole.

This excerpt from an editorial in the current Economist reflecting on the achievements of the late Milton Friedman. The point being made is that there is still a lot of work to be done. I don't quite share the assumption that the rising influence of the state is necessarily bad. Sure it means that people have less to spend on what they themselves want but might it not be that they want more spending on public goods and services of the type that only government can supply? Sadly, the answer is probably 'no'. Governments keep getting bigger largely through deception, obfuscation and inertia. Deception, in that it knows and has known for a long time that its subsidy programmes do nothing to help the people whom they are represented as benefiting. So massive farm subsidy programmes, sold as essential to maintain family farms, actually do no such thing: they overwhelmingly go to the largest landowners and massive agribusiness corporates. Obfuscation, in that government (with very few exceptions) does not target explicit policy outcomes, such as universal literacy, low crime rates, or basic health or employment goals. Instead it allocates public funds according to criteria that have little to do with people's considered wishes: media appeal or political expediency. Its decisions concern spending, rather than publicly accessible outcomes. Existing institutions, especially government agencies, and their ways of doing things are taken as a given.

And inertia, because many government programmes are self-entrenching. Subsidies to corporations, or protection for public sector workers, strengthens the forces of resistance to any meaningful reform. The Economist editorial goes on:

Governments are as convinced as ever that they know best how to spend their citizens' money.

But it's just as true to say that they may not be so convinced; they may see quite clearly that socially unjust, economically wasteful, and environmentally destructive subsidies (for example) are stupid. It's just that they lack the courage to end them.

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Social Policy Bonds

See the Social Policy Bonds website for overviews and links to articles, papers, news and more about Social Policy Bonds. Click on the image below to download a 2400-word article, published by the Institute of Economic Affairs, London.

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Social Policy Bonds in the media

9 October 2015: An article by Greg Bearup on the genesis of the Social Policy Bond idea, and application of a version of it in Australia appears in the Weekend Australian Magazine. (The article can also be downloaded as a pdf from here.)

October 2013: Professor Robert Shiller of Yale University, is named as one of the three winners of the 2013 Nobel Prize in Economics. His Nobel Prize lecture (pdf) delivered on 8 December, mentions Social Policy Bonds. Professor Shiller has for many years encouraged my work on Social Policy Bonds, beginning in late 1996 when he sent me this letter.

3 May 2012: An audio talk by Nobel Prize winner Professor Robert Shiller at the London School of Economics, in which Social Policy Bonds are briefly mentioned, is available here.